I think you are doing a great job and your children are going to benefit from your dedication and input. I'm a primary school teacher and studied early childhood and definately believe that reading begins in the home. I also spent time teaching students with learning difficulties, particularly in reading/writing and found that keeping it simple and relevant to them was what worked. A positive role model, making it a part of everyday living and fun, and praise for their interest and achievements/efforts all adds to their learning.

I've been reading to Ella since birth and she will definately choose books over any toy which is an absolute thrill for me to watch! She just loves them both independantly and as a shared activity with DH or I. I've also been using the Baby Einstein Flash cards with sight words and bright pictures since about 6 months.

I think that choosing books with:
~ large, clear font
~ which use age-appropriate language
~ with accompanying bright illustrations that reinforce the text
~ based on your child's individual interests
will also be invaluable.
Pointing out and repeating the main sight words - and showing her the picture or something in her environment that matches the word will also help. You can also make your own flash cards with the main sight words you feel she's interested in for her to play with. Playing games and singing songs as you are already doing is fantastic! I used to also play a little sound game using flash cards and counters. I'd place a counter over each letter in the word and as i said it, drawing the sound out a bit, eg cccc - aaaa - tttt, i'd push the counter down revealing the letter. I'd repeat the action several times, getting faster each time so that eventually the sounds blend together as we'd normally say it, eg cat. Not sure if that makes any sense - but this was something i used with infant chn so may be a bit old for your dd right now. The counters just made it a bit more of a game rather than just pointing to letters. Also 'Ants in the Apples' phonics programs are great! They involve singing a song "Ants in the apples -aaa (x3) - that's the sound that A makes! Each letter in the alphabet is sounded out in a fun phrase. There are lots of programs from more basic to more advanced in this series.

There are stacks of strategies you can use to aid the learning of reading/writing but i think that if you keep making whatever you choose to do a fun part of her life she will excel, and more importantly just have a love of language!